by Paul Davidson, USA TODAY

by Paul Davidson, USA TODAY

Despite signs of an improving economy, the Federal Reserve Wednesday said it will continue to pursue an easy-money policy aimed at holding down long-term interest rates and stimulating growth.

In a statement after a two-day meeting, the Fed said it will keep buying $85 billion a month in Treasury bonds and mortgage-backed securities until the labor market improves substantially, echoing its statements since last fall.

The monthly bond purchases raise bond prices, which pushes down their yields and also long-term interest rates broadly, cutting borrowing costs for consumers and businesses.

Markets rose after the Fed's announcement. The Dow Jones industrial average closed up 55.91 points, or 0.4%, to 14,511.73.

At a news conference, Fed Chairman Ben Bernanke acknowledged the recent pickup in the labor market, with non-farm job growth totaling 236,000 in February and averaging about 205,000 a month the past four months. That's up from 154,000 a month in the July-October period. "Obviously, there has been some improvement," he said.

But, he added, "we do need to see a sustained improvement" before the Fed reduces or ends its asset purchases. "One month or two months doesn't cut it." Bernanke noted job gains have strengthened in recent years only to weaken again.

The Fed slightly lowered its economic growth forecast, saying it expects the economy to grow 2.3% to 2.8% this year vs. its December projection of 2.3% to 3%.

The Fed said the economy has returned to a moderate pace of growth after "a pause" late last year. Economic growth slowed to just a tenth of a percentage point in the fourth quarter, but many economists expect an annual growth rate of 2% to 3% in the first quarter. Retail sales and business investment have beaten estimates of late, and the housing market has continued an encouraging rebound.

By year's end, the Fed predicts a slightly brighter job outlook. It expects the unemployment rate to fall to 7.3% to 7.5%, vs. its December forecast of 7.4% to 7.7%.

That was largely anticipated since the jobless rate in February already had dropped to 7.7% from 7.9%. One reason for the decline is the continuing retirement of Baby Boomers, leaving fewer people working or looking for work. Unemployment is projected to fall to 6% to 6.5% in 2015.

Inflation is expected to remain tame, at 1.3% to 1.7% this year and 2% or lower through 2015, the Fed's statement said.

Bernanke stressed that the Fed could reduce the purchases if the labor market gains steam and ramp them up again if it weakens. He also noted looming federal budget cuts that are expected to slow the economy midyear are one reason the Fed's stimulus "has been as aggressive as it is," and they could prompt a further increase in purchases.

Bernanke's portrayal of a flexible program that could vary month to month appeared to contrast many economists' view that paring the purchases would be a prelude to ending them.

Still, Jim O'Sullivan, chief U.S. economist of High Frequency Economics, says Bernanke's comments suggest the bond-buying could be scaled down by the third quarter if the federal budget cutting "does not lead to any significant slowing in employment growth."

Worries among investors emerged last month that the Fed might signal an early scale-back of the bond purchases after the Fed's January meeting minutes showed that "many" policymakers were growing concerned about the program's risks, such as financial instability. Some Fed officials said it should end or at least reduce the bond buying by midyear, before the job market picks up significantly.

The meeting minutes showed that the Fed planned to review the bond purchases at its March meeting. Some economists had expected the Fed at least to signal a possible tapering of the purchases later this year, in part because of recent economic reports that have exceeded forecasts.

Still, a payroll tax increase in January and across-the-board federal budget cuts that began March 1 are expected to pare 2013 economic growth by 1.5 percentage points, mostly by slowing the expansion in midyear.

Economist Mark Zandi of Moody's Analytics says that leaves the economy too vulnerable for the Fed to signal a possible early end to its stimulus, which itself could raise interest rates and hinder growth. Meanwhile, concerns about Europe's fragile economy have deepened recently.

The Fed on Wednesday also reiterated that it plans to keep its benchmark short-term interest rate near zero at least until the jobless rate falls to 6.5%, as long as the annual inflation rate remains below 2.5%.

Thirteen of 19 Fed policymakers at this week's meeting said 2015 remains the likely time frame for when the rate will initially be raised.